Allais Company's bond has an $85 annual interest payment that will mature in 10 years at a value of $1,000. The bond has a current market price of $1,140. What is the nominal yield of the bond?

Question

Quizplus · Accepted Answer

The nominal yield of the bond can be calculated using the following formula:

Nominal Yield = (Annual Interest Payment / Current Market Price) + (Annual Appreciation / Years to Maturity)

Annual Interest Payment = $85
Current Market Price = $1,140
Years to Maturity = 10
Annual Appreciation = (Face Value - Current Market Price) / Years to Maturity = ($1,000 - $1,140) / 10 = $14

Substituting the values in the formula:

Nominal Yield = (85 / 1,140) + (14 / 10) = 0.0746 + 0.014 = 0.0886 or 8.86%

Therefore, the nominal yield of the bond is 8.5% (option C).

Allais Company's Bond Has an $85 Annual Interest Payment That